America's House Party

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Others eyeball the neighbors more wistfully. Lottie Kovarek, 86, could sell her Chicago house for dozens of times the $10,500 she and her late husband paid in 1952. But as homes she has known for decades are being razed to build million-dollar-plus yuppie warrens, her street--once home to working-class Polish-American families--is losing its tight-knit character. But at least Kovarek owns her home. Writer Michael Glynn, 49, his wife and two kids rent an 850-sq.-ft. apartment in Santa Monica, Calif. There is barely enough space to shoehorn a tree in at Christmas, and Glynn's office doubles as his daughter's bedroom. Glynn and his wife considered buying a house when they married in 1994, but, he says, "I thought houses were overvalued." Now they can't afford their neighborhood, even though their income has grown considerably. So he and his wife are looking--in Oregon and Washington. "I kick myself when I think of places I saw" in the mid-'90s, Glynn says.

Past generations thought of their house as an investment, but a passive one. Burning the mortgage after 30 years promised a debt-free retirement and a little legacy for the next generation. But now people track their home values almost daily. And thanks to home-equity loans and refinancings, the home is an easily tapped source of cash. In 2004, U.S. homeowners took an estimated $139 billion out of the walls and floorboards through refinancings, compared with $26 billion in 2000, according to Freddie Mac. They put about 35% of that money into home improvements, spent 16% on consumer purchases, and used 26% to pay off debt (including credit cards for other consumer purchases), according to the Federal Reserve Board.

Of course, that's not free money. It's more debt, albeit at low interest. But you have to excuse homeowners for getting a little giddy. When they look at the rest of the economy, they see little else to be excited about. Employment has picked up, but wages haven't. Inflation has risen from the grave. The stock market is crawling to get back to where it was five years ago. Savings accounts throw off barely enough interest to feed a parking meter. Companies are cutting pensions, and politicians are making dire noises about Social Security. It's a scary message people are getting: We are heading toward a future in which we will need more money than ever to avert disaster, and there are fewer opportunities to get it. So people see their homes as their last, best hope for prosperity--as not just houses but also lifeboats.

FROM HOME TO PIGGY BANK

When people feel rich, they spend--whether their wealth is actual or merely on paper. We saw that phenomenon at work during the stock run-up of the '90s. It's called the wealth effect, and it's even more potent with housing. Over the past three years, the wealth effect from rising home values accounted for a third of all growth in consumer spending, according to Eric Belsky, executive director of the Joint Center for Housing Studies at Harvard University. He says consumer spending was single-handedly responsible for keeping us out of recession for two years.